What future for the minimum wage?

Should we continue to increase the minimum wage, or are there more effective ways to protect low income earners? Image sourced from www.shutterstock.com

Shortly the Fair Work Commission will announce their decision on the minimum wage for 2013.

This will be based on its own research and balancing the claims of employers, unions and others. The ACTU is calling for the wage to be increased by $30 per week, while the Australian Chamber of Commerce and Industry (ACCI) say it should be $5.80.

But in deciding what the minimum wage should be, there are some important missing questions.

Should working full-time be sufficient to earn an adequate income? Most people would answer yes. But the answer is more nuanced and depends largely on whether you are part of a family, or single wage earner.

Family wage to single earner

The Australian minimum wage has evolved considerably since the 1907 Harvester decision determined a “fair and reasonable” wage for a working man “and his family”.

While it remains important today with around 10% of adult employees receiving this rate of pay, over the past 25 years however there has been a major change in its role. In 1986, the minimum wage represented 99% of the disposable income of a single breadwinner couple family with two young children. Today it represents just 59%.

This has occurred despite the minimum wage remaining stable in real terms, through massively increased support from government to boost the living standards of low income working families. This has seen the real incomes of these families increase by 70%.

So to answer the first question then for families – the answer is no.

In contrast to this strong growth in income, a single person on the minimum wage has seen their real disposable income increase by just 11%, mainly as a result of tax cuts. Their disposable income has dropped from being 83% of that of a couple with children, to around 54%.

Effectively, over this period, the minimum wage has shifted from its traditional conception as being a wage for a family, to a wage for a single person. The mechanisms for this have been, as noted, increasing government support for families, and limiting growth in the real value of the minimum wage. A consequence of this wage policy has been that the labour market for low skills has been largely protected from wages pressure, enabling many jobs to be maintained.

Leaving households behind

In general it is a transformation which has occurred without generating significant disadvantage. It is though a process which is coming to an end. Continuing this policy will eventually leave some households behind.

What policies should then be put in place for the future? In thinking about this it is important to understand some other features of the minimum wage. While minimum wage employment and poor households are often seen as synonymous, the reality is different.

Just 31% of all minimum wage employees are in the poorest 20% of working households (after taking account of household size). Some 24% are in the richest 40% of households and a further 20% are in middle income households.

In large part, employment on the minimum wage supplements the earnings of others in the household who receive higher rates of pay. Where there is disadvantage in working households this is much more related to relying upon part-time work, rather than being on the minimum wage. Finally, despite holding the minimum wage stable for such a long period, Australia still has one of the highest minimum wages in the OECD, both in absolute terms, and relative to other earnings.

Paths to consider

With this transformation from a family wage ending, there are perhaps three major paths for consideration.

The first is for the minimum wage to increase in line with other increases in earnings. That is, as labour becomes more productive, real earnings grow. The difficulty with this path is that unless the productivity of minimum wage workers also increases – they produce more than they did in the past - then the price of this will be a loss of jobs.

The possibility exists that such improved productivity can be fostered by training and skills development, however if this policy is to be pursued then we have to be confident that this can actually be achieved for the least skilled and least productive.

The second option is to continue the policies of the past, holding the minimum wage steady. While there still may be some scope for this, sooner or later the gap between the living standards of some of those in receipt of the minimum wage and of the community as a whole will grow too large.

The third is to hold the minimum wage stable in real terms, but to complement the earnings of low income working households through an Earned Income Tax Credit – an employment conditional transfer payment. This would allow these households a higher standard of living without putting pressure on the labour market. Such policies already exist in many OECD countries. For these households, as with families with children, it would mean however that the answer to the opening question would also be no.

This is not an issue which requires immediate attention, nor is it a matter that can simply be put aside and left to annual wage reviews. Choosing some options will require new institutional arrangements. The question is, which direction do we want to go?

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